Daily Market Reports | Aug 08 2008
By Greg Peel
The Dow fell 224 points or 1.9%, while the S&P fell 1.8% and the Nasdaq 1.0%.
Recent strength on Wall Street was broken in emphatic fashion last night as more and more ingredients were added over the session to a stir-fry of weakness. It began with the second quarter result from the world’s largest insurer, AIG, which came out late after the bell on Wednesday.
Mortgage-related exposures and other impairments saw AIG post a US$5bn loss, which compares to a US$4bn profit in the June quarter 07. The earnings per share loss was US51c. Wall Street consensus had AIG making a US63c profit. How they could have been so incredibly wrong is anyone’s guess, but the failure by AIG to previously mark down CDOs to realistic levels, would be mine. Shares in AIG fell 18%. While such daily moves have become almost vanilla in some of the knocked-down financial names, this one-day fall was the biggest registered by AIG in decades.
The weekly jobless claims number came out before the opening bell, and a 7,000 increase took the total to 455,000 – the highest level since June 2003. The four-week average – which is the number most economists watch – rose by 26,750 to 419,500. A number above 400,000 is considered recessionary and this is the first breach in the current cycle.
Early in the session, both the European Central Bank and the Bank of England announced they were leaving their cash rates on hold. This was actually good news in the US, for a hike from the ECB in particular would have sent the US dollar tanking and perhaps turned the oil price around. So the greenback rallied against the euro and pound, but one needs to appreciate both central banks elected to stay on hold in the face of rapidly weakening economies.
The dollar rallied, but unfortunately so did oil – by US$1.44 to US$120.02/bbl. The problem was a a rebel attack on the major Turkish pipeline which feeds European supplies. The attack occurred earlier in the week, but was not thought to be overly problematic until last night, when it was announced the pipeline could be shut for 2-5 weeks. The rise in oil did not help the stock market.
Either way, after having fallen 20% of late, it is no great surprise the oil price needs to do some work around the technical level at US$120 before it can fall again.
The next ingredient came courtesy of the world’s biggest retailer Wal-Mart. The company announced a 3% increase in July same store sales, but noted that the positive result was boosted by stimulus cheques and traditional “back to school” buying. The Street was expecting 3.4%, but the crunch came when Wal-Mart suggested this month’s growth would only be in the range of 1-2%, which is quite a slowdown. Wal-Mart shares fell 6%.
The AIG result had already put the boot into the financial sector, but there was more to come. It all centred around a product called “auction rate securities”.
If you put your money in cash you expect a low interest rate, but unlimited access to that money. If you put your money in a fixed-term long bond account, you expect a much better interest rate, but no access to your money until maturity. Every thirty days auctions are held for such long bonds, which gave someone the brilliant idea of introducing a long bond security that could be reset and accessed by investors on a regular basis – high interest rate, cash-like access. Just another financial market “derivative” setting itself up for a fall.
The problem came, of course, when credit markets froze. Part of that freeze meant no more auctions. Investors tried to get their money out of the auction rate securities, but couldn’t. They were sold a product on unlimited access and then told there was no access. Last night, the Securities & Exchange Commission began acting on behalf of the small investors.
Citigroup was told it had to give back investments in ARSs, which will cost the bank US$7bn. This news sent Citi shares down 6%. It also sent all the big financial stocks tumbling, as they were all involved in issuing ARSs. The financial sector index fell 5%.
And just to kick a sector when its down, at 3pm ratings agency Moody’s announced it was putting American Express on downgrade review, concerned about the extent of poor quality consumer credit exposure. Amex shares fell 4%. Most of the loss in the indices came in the last two hours of trade.
And it didn’t end there. Fears of widespread ARS problems were realised when Bank of America announced after the bell it, too, had been subpoenaed by the SEC.
AIG, Wal-Mart, Citigroup, Amex and B of A are all Dow components.
Gold fell US$6.70 to US$872.50/oz as the US dollar rallied against European currencies. The dollar did not rally against the yen however, as the great commodity currency unwind continues. The Aussie slipped lower to US$0.9056.
Base metals actually staged a little bit of a rally, despite the stronger dollar and weak economic forecasts from the ECB and BoE. It would seem the major metals have fallen towards their cost of production, which of course theses days is much, much higher than in the past. Nickel received an added boost – jumping 5% – on news that a major Russian nickel producer was preparing to reduce production for that very reason.
The SPI Overnight fell 58 points.
Let the Games begin.
